4 ms·
One thing I don't get about "hedging": If you hedge, how do you make profit? While you get downside on your one bet and upside on other, things cancel out, righ
by sytelus 11y ago
One thing I don't get about "hedging": If you hedge, how do you make profit? While you get downside on your one bet and upside on other, things cancel out, right? Profits seems to be proportional to risk. Hedging reduces risk and hence reduces profits. I've heard "always hedge" lot of time but being naive in this area, I want to know how do professionals hedge while still bringing in significant profits.
- harmegido 11y agoThere's this joke in trading: "You can't make money hedging." Of course, not losing $1 is the same as making $1. So to answer your question, you don't make money hedging, instead you prevent yourself from losing it. Hedging is to lock in gains you've already made. When people say "always hedge", what they really mean is be diversified.
- blahblah3 11y agowell hedging could lower your expected value but increase your sharpe ratio (i.e lower the variance relative to reward).
- TheCoelacanth 11y agoYou don't, but hedge funds don't just do hedging. Hedge funds can use basically any investment strategy that they want to. The only common feature that they all share is obscenely high fees.
- EliRivers 11y agoWhile it is of course a vast field with much complication etc etc, here's a simple one. It does rely on you being right, but that's always true. If you think company X is going to do well compared to some benchmark, you go long on X and short on the benchmark. As long as you were right (i.e. X does do better than the benchmark) you'll make money no matter how they actually do. If X drops 50% and the benchmark drops 90%, you've made money. If X rises 20% and the benchmark rises 15%, you've made money.